Business cycles are measured by gross domestic product (GDP), a concept proposed by Simon Kuznets in 1934. To measure the GDP of previous years, the researchers made calculations ex post“backward”.
Recessions are usually accompanied by a bear market in the stock market (bear Market, or a nominal decline of at least 20% in the index) preceding them by 9-12 months. Analyzing that same period of 150 years, there have been 26 bearsbecause on six occasions there was a bear market without there being an economic recession. Historically, before a recession ends, a new bull market begins.
The most accurate recommendations to face a recession come from the wisdom of economics and finance theorists, from half a century of trial and error, and are the following:
1. Don’t rush in decisions charged with the emotion of the moment, such as fear or discouragement, attacking valuable assets and selling them at serious discounts or, also, taking very onerous loans for working capital, leaving key properties as collateral at large volumes.
2. Keep a liquid saddlebag with at least -what would be required in- a year of short-term expenses (suppliers, administrative expenses, services, etc.) to fall back on at any time. This liquidity can be divided into at least two reliable institutions, producing a null or very low return, to be converted into cash with absolute alacrity.
3. Develop a “war chest” to address the opportunities that will arise in a period of significant withdrawal in the activity of all businesses, such as very attractive valuations of competing companies, suppliers, clients or companies with parallel activities that can complement the company’s portfolio vertically or horizontally.
To be able to compete for acquisitions like these, the aforementioned chest should be an account that produces interesting returns but is also payable in short terms, and should typically represent 40% of a year’s sales. The rest of the transaction can be completed with swaps of shares or by leveraging at good rates the balance of the business to be purchased.